Madras High Court
Commissioner Of Income-Tax vs Tamil Nadu Industrial Investment ... on 10 November, 1994
Author: R. Jayasimha Babu
Bench: R. Jayasimha Babu
JUDGMENT Thanikkachalam, J.
1. In compliance with the direction of the High Court, the Tribunal referred the following questions under section 256(2) of the Income-tax Act, 1961, for the assessment years 1972-73, 1973-74 and 1974-75 for our opinion :
2. Assessment year 1972-73 :
"1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the income of Rs. 29,20,176 credited in the suspense interest account should not be included in the assessee's case for the assessment year 1972-73 ?
2. Whether the Appellate Tribunal's view that the method of accounting followed by the assessee in crediting the interest in the suspense account with reference to sticky loans could be accepted is sustainable in law ?"
3. Assessment year 1973-74 :
"3. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal as right in holding that the income of Rs. 60,41,528 credited in the suspense interest account should not be included in the assessee's case for the assessment year 1973-74 ?
4. Whether the Appellate Tribunal's view that the method of accounting followed by the assessee in crediting the interest in the suspense account with reference to sticky loans could be accepted is sustainable in law ?"
4. Assessment year 1974-75 :
"1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in deleting the inclusion of Rs. 43,12,656 being interest, commitment charges and guarantee commission on accrual basis in the assessment year 1974-75 ?
2. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in deleting the inclusion of Rs. 83,884 being the interest accrued on the amounts due on which the assessee had obtained court decree for recovery ?
3. Whether the Appellate Tribunal's view that the method of accounting followed by the assessee in crediting the interest in the suspense account with reference to the sticky loans could be accepted is sustainable in law ?"
5. The assessee is a State undertaking registered as a company incorporated for the purpose of providing finance for industry with a view to assist industrial development in the State. The assessee followed the mercantile system of accounting and the accounting years relevant for the assessment years 1972-73 and 1973-74 are the financial years ending with 31st March. In the assessment years 1972-73 and 1973-74, the assessee credited the amounts of Rs. 29,20,176 and Rs. 60,41,528, respectively, to the suspense interest account by debiting the accounts of such of these borrowers, whose accounts were considered "sticky". Since the recovery of the principal amount itself was doubtful of realisation, it was considered not prudent to take credit for the interest debited in such accounts as income of the year. However, the Income-tax Officer as of the view that since the assessee was following the mercantile system of accounting, there was no escape from inclusion of this amount as interest income. On appeal, the appellate Assistant Commissioner deleted the addition on the ground that the credit of such interest on doubtful debts to the suspense interest account and bringing it in the profit and loss account only when it is realised is also a method which cannot be said to be inconsistent with the mercantile system of accounting. The Appellate Assistant Commissioner was of the view that the method adopted by the assessee was consistent with the practice recognised by the Central Board of direct Taxes and the Reserve Bank of India and was also not inconsistent with the mercantile system of accounting and had been consistent with method regularly followed thereafter by the assessee. Accordingly, the Appellate Assistant Commissioner allowed the assessee's claim as admissible. However, on appeal, the Tribunal came to the conclusion that verification is necessary with regard to each item of sticky loan and the interest accrued thereon so as to find out whether the interest credited in the books of account of the assessee is recoverable. For this purpose, the Tribunal remitted back this issue to the file of the Income-tax Officer with a direction to consider each item of the amount mentioned under the head "Sticky loan" and decide the issue, according to the evidence available on record.
6. For the assessment year 1974-75, the Income-tax Officer brought to tax the accrued interest of Rs. 83,884 being the interest on two amounts for which the assessee had obtained a court decree for recovery. On appeal, the Appellate Assistant Commissioner found that the two loans under consideration were sticky loans. Following his earlier order for the assessment year 1972-73, the Appellate Assistant Commissioner held that the amounts credited in the suspense account cannot be taxed in the hands of the assessee on accrual basis. Accordingly, the Appellate Assistant Commissioner deleted the addition of Rs. 83,884. On further appeal, the Tribunal following its own order in the case the of the same assessee in the earlier years remitted back the assessment order to the Income-tax Officer for fresh disposal in the light of the observation made by it in its order. So also the Income-tax Officer brought to tax Rs. 43,12,656 being the interest, commitment charges and guarantee commission on accrual basis in this assessment year. On appeal, the Appellate Assistant Commissioner following his order for the earlier assessment year accepted the assessee's claim and on further appeal by the Revenue, the Tribunal following its earlier order I.T.A. Nos. 1824 and 1825/(Madras) of 1976-77 for the assessment years 1972-73 and 1973-74 dated July 31, 1978, upheld the order of the Appellate Assistant Commissioner.
7. We have heard learned standing counsel appearing for the Department as well as learned counsel appearing for the assessee. The point for consideration in these references is whether the interest accrued on the sticky loans in a case where the assessee followed the mercantile system of accounting can be included in the total income of the assessee for assessment purposes. This question came up for consideration before the Supreme Court in State Bank of Travancore v. CIT [1986] 158 ITR 102, wherein the Supreme Court has held as under (headnote :
"The interest on 'sticky' advances had accrued according to the mercantile system of accounting and the appellant had debited the respective parties with the interest. After the close of the accounting year, the appellant, without giving up the interest, which it could have, as a bad debt, did not offer it for taxation but carried it to the 'interest suspense account'. Carrying a certain amount which had accrued as interest without treating it as a bad debt or irrecoverable interest but keeping it in suspense account was repugnant to section 36(1)(vii) read with section 36(2) of the Income-tax Act, 1961. The concept of real income could not be so read as to defeat the object and the provision of the statutory enactment. Even if in a given circumstance, the amount might be taken to the interest suspense account for accounting purposes, that would not affect its taxability as such. The interest on 'sticky' advances was rightly treated as income which had accrued to the appellant."
8. This view was followed by the apex court in another decision in Kerala Financial Corporation v. CIT [1994] 210 ITR 129. This court also had an occasion to consider a similar question in CIT v. Annapurani Veerappan [1992] 193 ITR 426, wherein this court following the decision of the Supreme Court in State Bank of Travancore v. CIT [1986] 158 ITR 102 held that interest accrued on sticky loans where the assessee followed the mercantile system of accounting is includible in the total income of the assessee for assessment purpose. Thus, in view of the decisions cited supra, we hold that the order passed by the Tribunal in remitting back this issue to the Income-tax Officer for fresh disposal on verification of facts appears to be incorrect. The taxability of interest, commitment charges and guarantee commission, came up for consideration before this court and guarantee commission, came up for consideration before this in T.C. Nos. 688 and 689 of 1982 for the assessment years 1972-73 and 1973-74 in the case of the same assessee wherein this court held that all these items are includible in the total income of the assessee. This was also in accordance with the decision in CIT v. Annapurani Veerappan [1992] 193 ITR 426 (Mad). Accordingly, we answer the questions referred to us in all the references in the negative and in favour of the Department. Counsel's fee is fixed at Rs. 1,000.